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Quick Hits: Netflix Caught in the Web?

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Brief scrutiny of today's headlines.

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Netflix's (NFLX) new digital delivery of movies may undercut its existing DVD business and weaken, or kill, the company in the future, the Wall Street Journal reports.

Netflix now uses the Internet as a grand ordering device, allowing users to select from a library of about 100,000 movies on DVDs to be delivered by mail.

It's been a strong business, and investors have recently flocked to the company's stock as many consumers forego dinner and a movie out during a recession.

But a business that depends on the US Postal Service to get its product to customers may not last in the digital age - though Netflix remains the best game in town for at-home DVD delivery. Netflix has lately been cranking up its digital service, which allows users to watch movies online at no extra charge.

But the company's online library has only about 12,000 titles. Major competitors, including Apple (AAPL), Amazon (AMZN) and Hulu, a joint venture of News Corp. (NWS) and General Electric (GE) are also cranking up online delivery of movies. Home Box Office, a subsidiary of Time Warner (TWX), is securing exclusive Internet deals on some titles for limited periods of time.

Hollywood now generates about 75% of its revenue from DVD and TV, rather than theaters. As Netflix's online service grows, studios are almost certain to demand a bigger cut of the profits. Hollywood gets about 30% of revenue from DVD rentals, but commands about 70% from digital delivery. That's not a long-term winner for Netflix, especially in an increasingly competitive sector.

Independently owned neighborhood video stores have all but disappeared. Movie Gallery, parent of Hollywood Video, filed for Chapter 11 bankruptcy protection in 2007. Blockbuster (BBI) faces increased competition from big-box retailers such as Wal-Mart (WMT) and Best Buy (BBY) for DVD rentals.

The rapidly evolving home video industry suggests that Netflix as we know it must change quickly or die.
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